The Federal Reserve has indicated in recent weeks that it’s prepared to raise interest rates to combat rising inflation, which is currently resting at a 40-year high. Now, mortgage giant Fannie Mae says that such aggressive monetary action will slow economic growth in the year ahead.
In its February 2022 commentary, the company said that a 50-basis point rate hike is now predicted for March, followed by a series of rate hikes this year and next. Higher interest rates and a worker-scarce labor market led Fannie Mae’s Economic and Strategic Research (ESR) Group to downgrade its economic expectations for 2022. The group forecasts real gross domestic product (GDP) growth of 2.8%, down from 3.1%.
"Challenges to macroeconomic forecasting have grown not only because of inflation’s largely unexpected persistence but also because of its outsized and broad-based impact on the U.S. economy and global economic growth," said Doug Duncan, Fannie Mae senior vice president and chief economist, according to a company press release. "Headline inflation will likely decline from year-ago levels as price pressures ease, but upward price pressures are not expected to be as fleeting as initially thought – and it’s likely that the period of time required for inflation to be reversed has been extended significantly."
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Housing market predicted to slow in 2022
The ESR Group predicted the U.S. housing market will slow following its high growth rate seen in 2021, as home sales drop and home price growth moderates. Affordability constraints and rising mortgage rates will cause a higher-than-expected decline in home sales this year, according to Fannie Mae.
Home prices are expected to rise 7.6% in 2022 and 3.3% in 2023, the group said – a sharp drop from the dramatic increase of 17.3% seen in 2021. And as mortgage rates increase, now projected to end the year at 3.7%, housing refinance activity is predicted to drop 36% this year.
"For homebuyers, we believe that borrowing costs will likely rise with the increase in mortgage rates, further eroding affordability," Duncan said. "At the same time, we expect demographic factors and a shortage of housing supply to be supportive of housing activity. What remains unknown is how higher mortgage rates and tighter monetary policy – through expected interest rate hikes and changes to the makeup of the Fed’s portfolio – will impact home prices."
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Inflation expected to run higher than in 2021
"Compared to a few months ago, financial markets now expect a substantially more aggressive monetary posture from the nation’s central bank, which is likely to result in heightened volatility as the Fed retains the optionality necessary to engineer a non-inflationary soft landing," Duncan said.
According to Duncan, Fannie Mae is forecasting that the Consumer Price Index (CPI), a measure for inflation, will end 2022 at 4.4% and end 2023 at 2.5%, both above the Fed’s targeted 2%, but down from the rate of 7.6% in the fourth quarter of 2021.
"If correct, inflation will still be above the Fed’s 2% target at the end of next year, despite our expectation of more aggressive Fed action," Duncan said.
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